Real return on Fixed Deposits

Not all can undertsand the tricky relationship between the investment made and rate of return earned on the amount. 

Last Updated: Jun 13, 2016, 16:36 PM IST
Real return on Fixed Deposits

In this article we will understand what are the real returns on fixed deposits (FDs). Not all can undertsand the tricky relationship between the investment made and rate of return earned on the amount.

An average person expecting Rs 50,000 in investment is sure to be shocked on leaning that he receives Rs 40,000 in hands. And, this problem exists all across the globe. People generally forget to factor in inflation when counting returns on investment made.

Real returns = rate of return – inflation rate

So, one must look at investing in financial products which give returns higher than the existing inflation rate.

One must always understand that for the investments must be able to keep pace with inflation in order to get positive returns.

For instance, a product that cost Rs 100 presently will cost Rs 109 after a year if inflation grows at 9 percent.

Scenario with FDs

Fixed Deposits (FDs) are termed as one of the most popular investment products in India for the reason they offer high rate of interest in the range of 8.50 per cent to 9.25 per cent and are very secure in nature. However, they do attract income tax on returns made.

An individual receiving 8.50 per cent return from an FD would get a net return of 5.87 per cent, if he qualifies in 30.9 per cent tax slab.

Calculation:

Rate of return x (1- tax rate) x 100

8.5% x (1-30.9%) x 100 = 5.87%

Now, factoring in inflation of about 8% we get = Inflation – rate of return = 5.87% – 8% = -2.13%

Therefore, while making investment into FDs, you must factor in the existing inflation rate and taxation rate, so as to get worthwhile rate of return.